Guzman y Gomez discovers the problem of being popular

The spicy fast-food player has so much growth loaded into its shares Guzman is now more expensive than Nvidia. That puts it in a growth trap.

Mexican fast food chain Guzman y Gomez has seen its shares surge more than 30 per cent since listing. Picture: NCA NewsWire

Guzman y Gomez has discovered the high-growth curse: People always want more.

The spicy fast food player has so much growth loaded into its share price it’s becoming hard to impress. It doesn’t help the Aussie taco shop is now more expensive than AI darling Nvidia on one relative measure.

That’s why even strong sales performance from its Australian stores (albeit slowing) isn’t enough to support the heavy weight of expectation.

The first sign of this was a tepid response from investors when Guzman issued its first quarter sales. Its shares were off by 0.6 per cent in time for burritos at lunch before closing up 0.2 per cent. That underperformed a small gain in the broader market. It’s hardly the stuff of excitement.

Guzman was expensive when it made its stunning ASX debut in June. It is even more expensive today after shares in the fast-growing franchise have surged 33 per cent since.

As a comparison the taco chain’s two locally listed rivals Domino’s Pizza and local KFC operator Collins Food are flat and 7 per cent respectively over the same period.

The reason? Sure the growth outlook is bright, but underpinning gains is the extremely tightly held Guzman stock. Just 15 per cent of Guzman’s register is considered up for grabs under a free float. Then it was added to the S&P/ASX 200 Index last month, meaning index funds had to scramble to get hold of what little shares were available.

To get a sense on Thursday just 190,000 shares changed hands with most of these turning over in the last few minutes. That’s just $7m worth of shares on a $4bn stock on a milestone day.

These structural factors alone are likely to prevent any sharp falls if growth disappoints again.

Guzman y Gomez founder and CEO Steven Marks at the opening of his second US location in Chicago.

And to continue supporting an eye-popping price-to-earnings ratio of more than 290-times based on this year’s numbers, Guzman will have to pull off the seemingly impossible.

Guzman co-founder (and former hedge fund trader) Steven Marks knows the challenge is on. He is opening stores across Australia at a furious pace, which is helping to power sales up 20.7 per cent during the September quarter.

The key is to look at same store comparisons. While the pace of growth is slowing a touch, they are still pretty strong – up 8.7 per cent locally in September quarter versus 11.7 per cent this time last year.

This still puts it on track to beat its 2025 prospectus forecasts – an absolute test for any newly listed company.

As a guide, Collins Foods’ KFC business did 3.8 per cent same-store sales growth for last year while its Taco Bell franchise posted 3.5 per cent. Unlike Guzman, Collins recently warned it had got off to a slower start for the year.

Guzman is gaining ground in the fast food stakes through the healthy bent across its menu. It is also chasing the value stakes. It recently rolled out the $12 Chicken Mini Meal.

Global giant McDonald’s acknowledged recently that fewer people are eating out at fast food restaurants given cost of living pressures. It is looking to get more value items back onto the menu. It is also rolling out a lower-cost chicken version of its flagship Big Mac in the US.

Like Domino’s, Guzman is pushing an offshore expansion, however it’s been a slower grind here and this could be the very thing that makes or breaks its next share price spurt.

Guzman y Gomez fired up a sleepy ASX listings market. Picture: NCA NewsWire/David Swift

By a comparison one of its Aussie stores turned over $1.3m in sales on average during the September quarter. The more established of the offshore markets Singapore did $750,000 in average store turnover. Japan did just $500,000, while the US, which is a new market with four stores around Chicago, sold $650,000.

There’s a furious battle going on behind the scenes over whether Guzman really has a steep growth path ahead of it (the bull case), or the bear case that will simply become another Domino’s. That is a fast-food stock that burned bright but faded when new store openings run out of momentum. Guzman has declared it wants to open 1000 stores in Australia, mostly funded by its franchise model.

Goldman Sachs analysts recently slapped a sell rating on Guzman with a $33.20 price target. The shares last traded at $38.71.

Goldmans cited the “overly ambitious” long-term store expansion profile without precedent in Australia. They also worried about Guzman’s stretched valuation.

Wilson’s on the other hand has a $41.14 target on the stock saying they like the strong returns of the Australian stores.

Whether you like soft tacos or not there’s no doubt Guzman has so far proved its doubters wrong.

It made a splash in a pretty sorry ASX listings market. It raised $335m, giving it a $2.2bn valuation at the time, making it the biggest so far this year. And it has been able to build on the debut.

That’s at least worth an extra scoop of guacamole.

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Originally published as Guzman y Gomez discovers the problem of being popular